S2N Spotlight
Let us review the historic total return performance of bonds over the last 20+ years. For those who are recent subscribers, I am taking a look at the major asset classes and providing some sort of forward guidance.
Bonds are the anchor to most people’s portfolios. Bonds and Equities are roughly $50 trillion each in size. Treasuries are only about 40% of the total bond market, the rest being mainly corporate. Today we will focus on government debt as it provides the basis of the yield for all bonds.
This series of reviews and forecasts of the major asset classes will end with an analysis of how to tie it all together. For now we are focusing on each asset class independently. In the next few charts you will start to get a feel for the kind of return profile you can expect investing in bonds. Remember, US government bonds (Treasuries) are the safest investment on the planet. Pay attention; you may be surprised by the journey.
When you look at this performance chart, you would most probably be pretty damn impressed. Throw in a Sharpe Ratio over 20 years of 0.81, and things look pretty sweet. Now look at the compound annual growth rate of 2.25%, and you probably want to be ill. Investing in one of the greatest bond bull markets over the last 20 years would not have made you rich. It was the great enabler for the rest of the economy, kind of like Ghislaine Maxwell was for Jeffrey Epstein.
As most of us don’t cut ourselves off from the markets and only look at performance at the end of the year, I find a monthly performance table very useful. 2022 was a brutal year for the bond market, and you will see in the drawdown charts below that we have still not recovered the 2020 highs.
An old habit of mine is looking at returns under the plot of a normal distribution. If you wanted to sound knowledgeable, you would say it displays kurtosis, not to be mistaken for morning breath. For an extra bonus point, you would call it a leptokurtic distribution with positive excess kurtosis. In simple language, a tall centre with fat tails. Similar to my mother-in-law’s hairstyle.
One doesn’t usually associate bond investing with drawdown, so checking these 2 charts out is worth the effort. Mind the gap.
S2N Observations
Something made me tingle in all the wrong places when I read that Tether is moving their business to El Salvador. Yes, I know that this is probably the most crypto-friendly country on earth. Tether has a really sketchy past; so much of the crypto industry is greased by the Tether token, it would be very damaging if something bad was brewing. I am just making an observation: this is pure noise at this stage.
Another interesting factoid is that Hindenburg Research is dissolving. Nate Silver has built one of the most powerful and successful short sellers in history.
The markets seemed to love the higher inflation yesterday. Oh, I forgot it wasn’t as high as was expected. Headline inflation is still tracking at 2.90% and Core at 3.25%. When you gotta go, you gotta go, and the markets want to go, so let’s go. Good thing I suggested in yesterday’s note that we will probably have one more new high. Looks like Santa arrived late.
If you look at the monthly inflation numbers, except for 1 down month, we have had inflation every month. I am writing this note in a shopping centre, and I am in shock at how busy it is. What cost of living crisis?
I was in 2 minds whether to write about this.
In Freudian psychology, the phallic symbol is how one demonstrates dominance over someone or something. Anyone who read Liars Poker will be familiar with Michael Lewis’s Big Swinging Dick Syndrome. A note so clinical description of anxiety and insecurity rooted in a castration complex.
The table below demonstrates the state of play of nuclear warheads in 1986 and today. This is the ultimate phallic display of who has the bigger one. This is no laughing matter; just because we have avoided World War 3 so far doesn’t mean that it won’t happen. Given the geopolitical conflicts in the world today, I am amazed at how small risk premiums are.
S2N Screener Alerts
Every 46 days, Tesla enjoys a 2-sigma up day. It took an 8% up move for that to happen yesterday. Tesla remains one of the most overvalued companies in the US today. The Elon factor is simply so huge at the moment that there is no place for discounting reality.
Performance Review
For those who are new to the letter, the shading is Z-Score adjusted so that only moves bigger than usual for the symbol are highlighted.